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(a) Business Development
HEI, Inc., a Minnesota corporation, was incorporated as Hybrid Electronics Inc. in 1968 and changed its name to HEI, Inc. in 1969. During fiscal year 1999, the Company formed a subsidiary, HEI Export, Inc., as a foreign sales corporation. During fiscal year 2000, the Company acquired Cross Technology, Inc. (Cross), now a wholly-owned subsidiary of HEI. Under the terms of the acquisition, 600,000 shares of HEI common stock were exchanged for all of the outstanding stock of Cross. The transaction has been accounted for as a pooling of interests and, accordingly, all prior period financial information has been restated to include the combined results.
Principal Products and Services —HEI, Inc.'s microelectronics division is a designer and manufacturer of ultraminiature microelectronic devices and high technology products incorporating these devices. HEI's custom-built microelectronics are employed in the hearing, medical, telecommunications and industrial markets. The Company's subsidiary, Cross, makes wireless smart cards and other ultra-miniature radio frequency (RF) applications. The Company's Mexico division offers full contract manufacturing services using state of the art equipment and assembly processes. Additionally, the Company's high density interconnect division manufactures and designs high density, high quality flex circuits and high-performance laminate-based substrates.
On November 2, 2000 HEI, Inc. announced the completion of qualification testing for a new line of products to be known as HFC Series. The HFC Series are high frequency chip carriers designed for applications in high speed fiber optic and wireless communications. The new package provides superior performance up to 47GHz. HEI has filed for patent protection on this HFC Series technology as well as the method for high speed electrical testing of completed packages.
On August 24, 2000 HEI, Inc. announced the receipt of a production order for performing alignment of fiber optic devices. HEI's fiber optic alignment process has been qualified by the customer, and HEI has shipped product from two of its divisions; however, the ramp up to production volume has been delayed due to a shortage in customer supplied materials.
Distribution Methods —HEI sells through its Company-employed sales force based at its facilities in Minnesota and Arizona. The Company also sells through independent sales representatives.
Sources and Availability of Raw Materials —There are many sources of raw material supplies available nationally and internationally for Company operations. The manufacture of Company products involves assembly of components purchased from a wide variety of vendors.
Dependence on Single or Few Customers —Following is the approximate percentage of the Company's sales to major customers which accounted for more than 10% of total sales in fiscal years 2000, 1999, and 1998.
| Customer |
2000 |
1999 |
1998 |
||||
|---|---|---|---|---|---|---|---|
| Customer A | 42 | % | 52 | % | 50 | % | |
| Customer B | 15 | % | — | — | |||
| Customer C | 11 | % | — | — | |||
| Customer D | — | 13 | % | 12 | % |
Competition —In each of its product lines, the Company has significant competition, including users who may produce their own alternative devices. The Company obtains new business by identifying customer needs and engineering its products to meet those needs. It competes on the basis of engineering expertise, quality, service and price to obtain new and repeat orders.
Research and Development —The estimated amount spent on Company-sponsored research and development activities was approximately $1,764,000, $1,343,000 and $852,000 for the years ended August 31, 2000, 1999 and 1998, respectively.
Employees —On August 31, 2000, the Company employed approximately 222 persons of whom one was part-time.
